As the U.S. election campaign comes to a close, keep an eye on currency markets – the outcome of the race could impact the U.S. dollar and marketplace, along with other global currencies.
“If Democrat Hillary Clinton wins the election, the most likely result is that it’s going to be considered business as usual, [as] there will be continuity with the existing Obama administration,” says Luc de la Durantaye, first vice-president of global asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
As a result, he expects a Clinton win could spark a relief rally. And, in that environment, “the U.S. dollar would probably be slightly stronger given fiscal policy stimulus – and that would help growth. So, [a Clinton win] would probably be U.S. dollar-positive and equity market-positive.”
Read: What could a Trump presidency mean for Canadian institutional investors?
Conversely, if Republican Donald Trump is elected, there’d be more risk, says de la Durantaye. “This is the [election] result that would contain [the] most policy risk: there would be a much larger fiscal stimulus according to his campaign promises [and] that would therefore support the U.S. dollar.”
But, with the economic uncertainty that a Trump win would bring, “the U.S. dollar’s strength would be more related to a flight to safety” than based on a positive market reaction.
Still, the U.S. dollar would likely also be boosted by volatility in Mexican and Chinese markets, he adds, due to Trump’s proposed trade plans.
What about the loonie?
If Trump is elected, expect that to weigh on the Canadian dollar, says de la Durantaye.
Already, the Mexican peso has declined on Trump’s plan to cease trade association, he adds. And, “the Canadian economy would be indirectly impacted if there were any renegotiation of the free trade agreement. From that perspective, the loonie has a bit more downside than what’s been priced at the moment.”
The value of the Canadian dollar after election night also depends on the outlook for oil prices, says de la Durantaye. “We don’t see a big run-up in oil prices, [but] we think the outlook for the loonie at the margin is slightly negative particularly under a Trump [win].”
Read: Why dynamic hedging is a good option for managing currency risk
Since de le Durantaye expects the loonie to decline, he’s looking to invest in foreign currencies. “A number of emerging markets provide better growth and they don’t face as [many] headwinds as developed markets. Developed markets are facing high debt ratios [and] zero interest rates.”
And, in addition to hedging the Canadian dollar against the U.S. dollar, de la Durantaye is looking at a number of Asian currencies over the long term. Those include the Indian rupee and Indonesian rupiah, which are both from economies that “offer a very high interest rate, better demographic[s] and better growth opportunity. That will support [those] currencies over a 12- to 18-month period.”
Outlook for euro and the pound
The effects of the U.S. election result on Great Britain are not as clear, he says, because there are already elements of the country’s economy that are detrimental to the value of its currency, says de la Durantaye.
Mainly, “Prime Minister May has talked about a hard Brexit,” he adds, noting, “we’ve seen a negative reaction on the pound already.”
Read: Canadian pension solvency survives Brexit, for now: survey
Europe is also facing challenges independent of the U.S., says de la Durantaye. “In the eurozone, you have issues in the banking system that are resurfacing [like] what’s next for the European monetary policy. There’s a lot of uncertainty [outside of] the U.S. election that may very well affect the euro.”
So, de la Durantaye predicts, “on the euro side, we still see more of a trading range rather than a specific direction.”
This article was originally published on our companion site, Advisor.ca